We study the efficiency of cryptocurrencies by measuring the price’s reaction time to unexpected relevant information. We find the average price delay to significantly decrease during the last three years. For the cross-section of 75 cryptocurrencies we find delays to be highly correlated with liquidity.

@article{Müller2018b,
title = {Wrong-way-risk in tails},
author = {Janis Müller and Peter N Posch},
url = {https://doi.org/10.1057/s41260-018-0076-9},
doi = {10.1057/s41260-018-0076-9},
issn = {1479-179X},
year = {2018},
date = {2018-07-01},
journal = {Journal of Asset Management},
volume = {19},
number = {4},
pages = {205--215},
abstract = {With new regulations like the credit valuation adjustment, the assessment of wrong-way-risk is of utter importance. We analyse the effect of a counterparty's credit risk and its influence on other asset classes (equity, currency, commodity and interest rate) in the event of extreme market movements like the counterparty's default. With an extreme value approach, we model the tail of the joint distribution of different asset returns belonging to the above asset classes and counterparty credit risk indicated by changes in CDS spreads and calculate the effect on the expected shortfall when conditioning on counterparty credit risk. We find the conditional expected shortfall to be 2 to 440% higher than the unconditional expected shortfall depending on the asset class. Our results give insights both for risk management and for setting an initial margin for non-centrally cleared derivatives which becomes mandatory in the European Market Infrastructure Regulation.},
keywords = {},
pubstate = {published},
tppubtype = {article}
}

With new regulations like the credit valuation adjustment, the assessment of wrong-way-risk is of utter importance. We analyse the effect of a counterparty's credit risk and its influence on other asset classes (equity, currency, commodity and interest rate) in the event of extreme market movements like the counterparty's default. With an extreme value approach, we model the tail of the joint distribution of different asset returns belonging to the above asset classes and counterparty credit risk indicated by changes in CDS spreads and calculate the effect on the expected shortfall when conditioning on counterparty credit risk. We find the conditional expected shortfall to be 2 to 440% higher than the unconditional expected shortfall depending on the asset class. Our results give insights both for risk management and for setting an initial margin for non-centrally cleared derivatives which becomes mandatory in the European Market Infrastructure Regulation.

@article{value_of_surprise_timotheos,
title = {Real-time event detection: What is the impact of surprise?},
author = {Timotheos Paraskevopoulos },
url = {https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3199768},
year = {2018},
date = {2018-03-15},
abstract = {In the study of event detection in online social and news media initially identified real-world events of all kind can be ranked according to some measure of their impact on the financial markets. The highest ranked nodes are associated with substantial financial risks and therefore require particular attention. %In our empirical study, we show that the ranking depends on the awareness level and speed of propagation of the event.
We shed light on a possible mechanism behind this dependence in an analytically tractable example. In particular, based on a recently introduced concept of topic detection, paired with an empirical complex network we introduce the level of surprise as an aggregate over all relevant events within an informational ecosystem as the basis of the ranking. We found that the proposed quantity has a significant effect on the observed fluctuations of the S\&P500 and leads to substantial improvements in volatility modeling when it incorporates in traditional volatility models.},
keywords = {event detection, network theory, twitter},
pubstate = {published},
tppubtype = {article}
}

In the study of event detection in online social and news media initially identified real-world events of all kind can be ranked according to some measure of their impact on the financial markets. The highest ranked nodes are associated with substantial financial risks and therefore require particular attention. %In our empirical study, we show that the ranking depends on the awareness level and speed of propagation of the event.
We shed light on a possible mechanism behind this dependence in an analytically tractable example. In particular, based on a recently introduced concept of topic detection, paired with an empirical complex network we introduce the level of surprise as an aggregate over all relevant events within an informational ecosystem as the basis of the ranking. We found that the proposed quantity has a significant effect on the observed fluctuations of the S&P500 and leads to substantial improvements in volatility modeling when it incorporates in traditional volatility models.

@article{GJP2016,
title = {Does the Introduction of Futures Improve the Efficiency of Bitcoin?},
author = {Gerrit Köchling and Janis Müller and Peter N Posch},
url = {https://doi.org/10.1016/j.frl.2018.11.006},
year = {2018},
date = {2018-02-26},
abstract = {Following up recent studies on the inefficiency of Bitcoin, we test the informational efficiency of Bitcoin before and after the launch of Bitcoin futures. Futures allow easier market access for institutional investors who improve price efficiency according to studies for the stock market. Regarding the period before the launch, our results are consistent with recent findings. From the involvement of institutional traders onwards, however, we cannot reject the informational efficiency hypothesis for any of our applied tests.},
keywords = {Bitcoin, cryptocurrency, institutional investors, Market efficiency},
pubstate = {forthcoming},
tppubtype = {article}
}

Following up recent studies on the inefficiency of Bitcoin, we test the informational efficiency of Bitcoin before and after the launch of Bitcoin futures. Futures allow easier market access for institutional investors who improve price efficiency according to studies for the stock market. Regarding the period before the launch, our results are consistent with recent findings. From the involvement of institutional traders onwards, however, we cannot reject the informational efficiency hypothesis for any of our applied tests.

@workingpaper{PS2018,
title = {Using the Extremal Index for Value-At-Risk Backtesting},
author = {Peter N Posch and Philipp Schmidtke and et al.},
year = {2018},
date = {2018-02-15},
abstract = {We introduce a new value at risk forecasting backtest by establishing a connection between the independence property of value at risk forecasts and a general measure of extremal clustering of stationary sequences (extremal index). We introduce a sequence of relative excess returns whose extremal index has to be estimated. We compare our backtest to both popular and recent competitors using Monte-Carlo simulations and find considerable power. For example, the new test allows the rejection of the popular unconditional Historical Simulation method more frequent.},
keywords = {Extremal Index, VaR Backtest},
pubstate = {published},
tppubtype = {workingpaper}
}

We introduce a new value at risk forecasting backtest by establishing a connection between the independence property of value at risk forecasts and a general measure of extremal clustering of stationary sequences (extremal index). We introduce a sequence of relative excess returns whose extremal index has to be estimated. We compare our backtest to both popular and recent competitors using Monte-Carlo simulations and find considerable power. For example, the new test allows the rejection of the popular unconditional Historical Simulation method more frequent.

@article{Müller2018,
title = {Wrong-way-risk in tails},
author = {Janis Müller and Peter N Posch},
url = {https://doi.org/10.1057/s41260-018-0076-9},
doi = {10.1057/s41260-018-0076-9},
issn = {1479-179X},
year = {2018},
date = {2018-01-01},
journal = {Journal of Asset Management},
abstract = {With new regulations like the credit valuation adjustment, the assessment of wrong-way-risk is of utter importance. We analyse the effect of a counterparty's credit risk and its influence on other asset classes (equity, currency, commodity and interest rate) in the event of extreme market movements like the counterparty's default. With an extreme value approach, we model the tail of the joint distribution of different asset returns belonging to the above asset classes and counterparty credit risk indicated by changes in CDS spreads and calculate the effect on the expected shortfall when conditioning on counterparty credit risk. We find the conditional expected shortfall to be 2 to 440% higher than the unconditional expected shortfall depending on the asset class. Our results give insights both for risk management and for setting an initial margin for non-centrally cleared derivatives which becomes mandatory in the European Market Infrastructure Regulation.},
keywords = {},
pubstate = {published},
tppubtype = {article}
}

With new regulations like the credit valuation adjustment, the assessment of wrong-way-risk is of utter importance. We analyse the effect of a counterparty's credit risk and its influence on other asset classes (equity, currency, commodity and interest rate) in the event of extreme market movements like the counterparty's default. With an extreme value approach, we model the tail of the joint distribution of different asset returns belonging to the above asset classes and counterparty credit risk indicated by changes in CDS spreads and calculate the effect on the expected shortfall when conditioning on counterparty credit risk. We find the conditional expected shortfall to be 2 to 440% higher than the unconditional expected shortfall depending on the asset class. Our results give insights both for risk management and for setting an initial margin for non-centrally cleared derivatives which becomes mandatory in the European Market Infrastructure Regulation.

@article{KOCHLING2018b,
title = {Does the introduction of futures improve the efficiency of Bitcoin?},
author = {Gerrit Köchling and Janis Müller and Peter N Posch},
url = {http://www.sciencedirect.com/science/article/pii/S1544612318304124},
doi = {https://doi.org/10.1016/j.frl.2018.11.006},
issn = {1544-6123},
year = {2018},
date = {2018-01-01},
journal = {Finance Research Letters},
abstract = {The introduction of futures on Bitcoin eases the access of institutional investors to the market and offers an efficient way to short the cryptocurrency. We investigate the effect of this event on the market’s price efficiency and find the Bitcoin market to turn efficient. We conduct commonly used tests for market efficiency and check the robustness of our results by investigating Bitcoin Cash, a hard fork of Bitcoin, where we do not find a change in market’s efficiency.},
keywords = {},
pubstate = {published},
tppubtype = {article}
}

The introduction of futures on Bitcoin eases the access of institutional investors to the market and offers an efficient way to short the cryptocurrency. We investigate the effect of this event on the market’s price efficiency and find the Bitcoin market to turn efficient. We conduct commonly used tests for market efficiency and check the robustness of our results by investigating Bitcoin Cash, a hard fork of Bitcoin, where we do not find a change in market’s efficiency.

In a consumption based asset pricing model one can calculate the volatility of (log-)consumption growth from the expected market return and from the risk-free rate. We propose to use the difference between these estimates to measure ambiguity about consumption volatility. Using a long dataset we show this measure explains up to 69% of post-war variation in the market risk premium.

@article{tppnpcomovement,
title = {Time-frequency linkages and co-movements between the euro and European stock market: A continuous wavelet analysis.},
author = {Timotheos Paraskevopoulos and Peter N Posch},
url = {https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2979416},
year = {2017},
date = {2017-09-29},
abstract = {We investigate the evolution of co-movement and lead-lag relationships between
the nominal effective European exchange rate and the largest European stock
markets in the time and frequency dimension. We decompose the financial
return series into different time scales and apply the cross-wavelet coherence and
phase difference. Within our sample set, which consists of daily data from 2000
to 2016, we observe patterns consistent with the notion of contagion, suggesting
strong and sudden increases in the cross-market synchronization on very specific
frequency bands. Investigating the lead-lag relationships between both markets,
we observe periods and frequencies where the causality runs from one variable
to the other and vice-versa.
},
keywords = {Co-movement, wavelet, wavelet-coherence},
pubstate = {published},
tppubtype = {article}
}

We investigate the evolution of co-movement and lead-lag relationships between
the nominal effective European exchange rate and the largest European stock
markets in the time and frequency dimension. We decompose the financial
return series into different time scales and apply the cross-wavelet coherence and
phase difference. Within our sample set, which consists of daily data from 2000
to 2016, we observe patterns consistent with the notion of contagion, suggesting
strong and sudden increases in the cross-market synchronization on very specific
frequency bands. Investigating the lead-lag relationships between both markets,
we observe periods and frequencies where the causality runs from one variable
to the other and vice-versa.

We assess the effect of decreasing energy return on investment (EROI) of oil on long-term
commodity price developments. Relying on a price-based approach we show that periods of low
EROIs coincide with periods of high commodity prices. Since 1938, the EROI of oil is the most
important variable for commodity price variations compared to economic growth, interest rates
and uncertainty. Within a structural vector autoregression model the EROI of oil explains up to
30% of commodity price index fluctuations. Our results provide a novel perspective on the
influence of decreasing EROIs of the energy supply mix on long-term commodity price
developments.

We examine the effect of financial investments on the futures market of seventeen agriculture
commodities during 2006-16. Introducing a financialization index we show that financial
investors significantly affect the variation in the co-movement of these commodities. We find
even stronger evidence that a higher relative share of commodity index traders increases the
correlation between individual commodity prices. Our analysis indicates that in order to avoid
financial interests affecting agriculture markets the relative share of commodity index traders’
long open interest should not be significantly higher than 28%. Changes in the intensity of
financial speculation thus have a non-negligible influence on agriculture commodity markets.

We present a forecasting algorithm based on support vector regression emphasizing the practical benefits of wavelets for financial time series. We utilize an effective de-noising algorithm based on wavelets feasible under the assumption that a systematic pattern plus random noise generate the data. The learning algorithm focuses solely on the decomposed time series components, leading to a more general approach. Our findings propose how machine learning can be used for data science applications in combination with signal processing methods. Applying the algorithm to real life financial data, we find wavelet decompositions to improve forecasting performance significantly.

@article{Erhardt2017,
title = {Bail-in and asset encumbrance - Implications for banks' asset liability management},
author = {Johannes Lübbers and Peter N Posch and et al.},
url = {https://doi.org/10.1057/jbr.2016.4},
doi = {10.1057/jbr.2016.4},
issn = {1750-2071},
year = {2017},
date = {2017-01-01},
journal = {Journal of Banking Regulation},
volume = {18},
number = {2},
pages = {149--162},
abstract = {In response to the financial crisis the European Union proposes bail-ins as a new regulatory instrument. For banks this mechanism affects the funding costs that now depend on the amount of assets under encumbrance. The bank's optimal level of asset encumbrance, however, is not necessarily optimal for its senior unsecured investors. In a new simulation framework, we access the effects of the bail-in regulation and the effect on the costs of banks and investors. Analyzing major EU banks' funding structure we find funding cost should be up to 49 basis points higher to reflect the increased risk for senior unsecured investors. On the other hand all banks of our sample could lower their overall cost level by up to 17 basis points by increasing the level of asset encumbrance.},
keywords = {},
pubstate = {published},
tppubtype = {article}
}

In response to the financial crisis the European Union proposes bail-ins as a new regulatory instrument. For banks this mechanism affects the funding costs that now depend on the amount of assets under encumbrance. The bank's optimal level of asset encumbrance, however, is not necessarily optimal for its senior unsecured investors. In a new simulation framework, we access the effects of the bail-in regulation and the effect on the costs of banks and investors. Analyzing major EU banks' funding structure we find funding cost should be up to 49 basis points higher to reflect the increased risk for senior unsecured investors. On the other hand all banks of our sample could lower their overall cost level by up to 17 basis points by increasing the level of asset encumbrance.

We study the relation between hedge accounting and firm value. We propose an easily replicable procedure to generate a dataset directly from company’s annual reports. Using our algorithm we are able to classify, for the first time, firms into cash flow, fair value, or foreign net investment hedge accounting. Our approach allows us to give an overview of hedge accounting use over industries and time. We find significantly positive effects of fair value and foreign net investment hedges on firm value. However cash flow hedge accounting, which makes up the majority of observations, appears to have no substantial influence.

Utilizing the Merton (1974) framework we introduce a model for a firm’s optimal hedge ratio. This ratio results from trading off ex-ante expected financial distress costs (FDC) which are determined by an all-or-nothing put option in a static capital structure model. We continue to test our theoretical findings in an empirical setting. We obtain data for 185 SMEs’ hedging activity with a major bank on a single-contract level as well as their Basel II default probabilities and historical accounting information. We demonstrate our model’s ability to explain observed cross-sectional differences in the hedge ratio. Hereby we provide strong empirical evidence that German firms hedge in response to financial distress costs incentives.

@article{doi:10.1108/QRFM-12-2012-0033,
title = {Value-based assessment of sovereign risk},
author = {Peter N Posch and et al.},
url = {https://doi.org/10.1108/QRFM-12-2012-0033},
doi = {10.1108/QRFM-12-2012-0033},
year = {2014},
date = {2014-01-01},
journal = {Qualitative Research in Financial Markets},
volume = {6},
number = {2},
pages = {157-172},
abstract = {Purpose – The purpose of this paper is to introduce a methodology to evaluate sovereign risk. Hereby, a value-based approach using different market measures is introduced. Design/methodology/approach – This study’s approach aims to provide a value-based assessment of sovereign risk, combining market measures from government bond, credit derivatives and other markets as well as economic indicators. Findings – The study finds that the assessment of sovereign risk is only possible when using information from different markets and adjusting according to the information included in these measures. Combining both market-based and economic information leads to a value-based evaluation of sovereign risk. Practical implications – The practical implications are given for any institution with sovereign risk on their asset side. In fact, part of this research was done for the German Actuarial Foundation which uses the recommendations of this paper for the insurance industry. Originality/value – The study’s approach is novel because it is the first to include several market-based and economic measures of a sovereign and combines it into a value-based assessment.},
keywords = {},
pubstate = {published},
tppubtype = {article}
}

Purpose – The purpose of this paper is to introduce a methodology to evaluate sovereign risk. Hereby, a value-based approach using different market measures is introduced. Design/methodology/approach – This study’s approach aims to provide a value-based assessment of sovereign risk, combining market measures from government bond, credit derivatives and other markets as well as economic indicators. Findings – The study finds that the assessment of sovereign risk is only possible when using information from different markets and adjusting according to the information included in these measures. Combining both market-based and economic information leads to a value-based evaluation of sovereign risk. Practical implications – The practical implications are given for any institution with sovereign risk on their asset side. In fact, part of this research was done for the German Actuarial Foundation which uses the recommendations of this paper for the insurance industry. Originality/value – The study’s approach is novel because it is the first to include several market-based and economic measures of a sovereign and combines it into a value-based assessment.

@article{doi:10.1108/JRF-03-2013-0019,
title = {Managing and trading sovereign risk using credit derivatives and government markets},
author = {Peter N Posch and et al.},
url = {https://doi.org/10.1108/JRF-03-2013-0019},
doi = {10.1108/JRF-03-2013-0019},
year = {2013},
date = {2013-01-01},
journal = {The Journal of Risk Finance},
volume = {14},
number = {5},
pages = {453-467},
abstract = {Purpose – The sovereign debt crisis in Europe increased the demand for asset manager worldwide to monitor and manage their sovereign risk. While using information from the credit derivatives and bond markets has been used widely in the corporate sector its usage for sovereign risk is novel. The paper aims to discuss these issues. Design/methodology/approach – The basis between a sovereign credit default swap (CDS) and the government bond contains valuable information for assets managers and traders alike. The paper demonstrates the use of the basis between the announcement date and the issue date of a new government bond to decide whether an investment in this bond is profitable. Findings – With this strategy, the authors are able to generate both over all excess returns with a European sovereign portfolio since 2008 as well as a constant outperformance of simple average euro government bond portfolios. The paper furthermore tests the economic rationale behind this trading strategy and confirms prior findings from the corporate market. CDS market liquidity is among the main driver and it follows that the CDS market is faster in anticipating risks than the bond market not only for corporate but also for sovereign entities. Originality/value – The authors are the first to study the sovereign basis in a sound trading and asset management environment. The paper provides economic explanations and checks for the robustness of the results before the primary issuance of a new government bond.},
keywords = {},
pubstate = {published},
tppubtype = {article}
}

Purpose – The sovereign debt crisis in Europe increased the demand for asset manager worldwide to monitor and manage their sovereign risk. While using information from the credit derivatives and bond markets has been used widely in the corporate sector its usage for sovereign risk is novel. The paper aims to discuss these issues. Design/methodology/approach – The basis between a sovereign credit default swap (CDS) and the government bond contains valuable information for assets managers and traders alike. The paper demonstrates the use of the basis between the announcement date and the issue date of a new government bond to decide whether an investment in this bond is profitable. Findings – With this strategy, the authors are able to generate both over all excess returns with a European sovereign portfolio since 2008 as well as a constant outperformance of simple average euro government bond portfolios. The paper furthermore tests the economic rationale behind this trading strategy and confirms prior findings from the corporate market. CDS market liquidity is among the main driver and it follows that the CDS market is faster in anticipating risks than the bond market not only for corporate but also for sovereign entities. Originality/value – The authors are the first to study the sovereign basis in a sound trading and asset management environment. The paper provides economic explanations and checks for the robustness of the results before the primary issuance of a new government bond.

@article{Heider2013,
title = {Cross-Market Valuation with Full Information on the Company’s Capital Structure},
author = {Peter N Posch and et al.},
doi = {10.4236/jmf.2013.33A007.},
year = {2013},
date = {2013-01-01},
journal = {Journal of Mathematical Finance},
volume = {3},
number = {3A},
abstract = {Most models for forecasting a company’s value either use only information from single markets or compress information from other markets. We propose a model using a company’s full capital structure including the term structure and type of outstanding debt to assess its future value. We discuss the numerical properties of our model and demonstrate its usefulness when estimating the probability of default as a valuation example.},
keywords = {Cross-market valuation},
pubstate = {published},
tppubtype = {article}
}

Most models for forecasting a company’s value either use only information from single markets or compress information from other markets. We propose a model using a company’s full capital structure including the term structure and type of outstanding debt to assess its future value. We discuss the numerical properties of our model and demonstrate its usefulness when estimating the probability of default as a valuation example.

@article{Posch2013,
title = {Benford or Not-Benford? How to test for the First-Digit Law },
author = {Peter N Posch},
year = {2013},
date = {2013-01-01},
journal = {JP Journal of Fundamental and Applied Statistics},
volume = {4},
number = {Issues 1 & 2},
pages = {1-22},
abstract = {In this paper, we discuss several methods used to examine the goodness-of-fit
of a given dataset to the so-called Benford’s law. While the use of distance
measures itself suffer from theoretical founded critical values, the procedures
used in literature so far do not provide a more clear statement. Apart from
using graphical methods (like histogram, etc.), which are not part of the
discussion, the often used Distortion Factor Model is extended to the
Mantissa-Distortion-Factor (MDF) and a Benford-specific test procedure is
introduced. This test is based the property of invariance of scale and base,
which is an underlying feature of the First-Digit-Law. The so called
Transformation-Invariance-Test (TIT) is derived as a closed form testprocedure.
The practical power of the TIT is shown using a widely used
macroeconomic dataset.},
keywords = {benford},
pubstate = {published},
tppubtype = {article}
}

In this paper, we discuss several methods used to examine the goodness-of-fit
of a given dataset to the so-called Benford’s law. While the use of distance
measures itself suffer from theoretical founded critical values, the procedures
used in literature so far do not provide a more clear statement. Apart from
using graphical methods (like histogram, etc.), which are not part of the
discussion, the often used Distortion Factor Model is extended to the
Mantissa-Distortion-Factor (MDF) and a Benford-specific test procedure is
introduced. This test is based the property of invariance of scale and base,
which is an underlying feature of the First-Digit-Law. The so called
Transformation-Invariance-Test (TIT) is derived as a closed form testprocedure.
The practical power of the TIT is shown using a widely used
macroeconomic dataset.

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